Dodla Dairy Limited IPO Review-6 Point Analysis

Introduction:

Dodla Dairy’s Rs.520 Cr IPO is open for subscription during June 16-June 18, 2021. The IPO is subscribed 2.94 times on the 2^nd day, as of June 17, 2021. Should you subscribe? Here is a 6 point analysis of the IPO review. 

1. IPO Details:

• The IPO Window for subscription is open between 16^th June 2021 to 18^th June 2021.
• The Issue Size of the IPO of Dodla Dairy is Rs. 520 Cr. Out of which, fresh issue comprises of Rs. 50 Cr. and Offer for Sale is of Rs. 470 Cr.
• The Price Band of the IPO ranges between Rs. 421 to Rs. 428 per equity share. The Face Value of Equity Share is Rs. 10 per equity share.
• The Stock will list on both the stock exchanges i.e., BSE and NSE.
• An investor can apply for 35 shares in 1 lot and hence in multiples thereof up to 13 Lots).
• The Objective of the Fresh Issue of the company is:

i) To Retire Debt worth Rs.32.26 Cr (Company will be Debt-free post issue)

ii) Fund Incremental Capex Requirement of Rs.7.15 Cr.

iii) General Corporate Purposes

• Promoters and Investors and their respective Equity Shares via offloading are as follows:

i) TPG Dodla Dairy Holdings Pte Ltd, Singapore- 92 Lakh Equity Shares

ii) Dodla Sunil Reddy- 4.16 Lakh

iii) Dodla Family Trust- 10.41 Lakh

iv) Dodla Deepa Reddy- 3.23 Lakh

• The Reservation Quota of the Investors are as follows: Qualified Institutional Buyers (QIBs)-50%, Non-Institutional Investors (NIIs)- 15%, and Retail Investors- 35%

2. Company Overview:

• Dodla Dairy was Incorporated in 1995 & Commenced its Production in 1997.
• Dodla Dairy is an integrated dairy company based in south India.
• The company is engaged in the Procurement, Processing, Distribution, and Marketing of Milk & other dairy products.
• Dodla Dairy is having a diversified product portfolio:

i) Processed Milk (full cream, standardized, toned, and double toned)

ii) Dairy-based value-added products include Curd, Ghee, Butter, Flavoured milk, Ice cream.

• In terms of Market Positioning, it is India’s 3^rd Largest Dairy company by Daily Milk Procurement. The average Procurement of Raw Milk is 1.03 MLPD (million liters per day) as of Mar-21. Also, Dodla Dairy is the 2^nd Biggest by Market Presence among Private Dairies.
• The company also manufactures & sells cattle feed to farmers through its procurement network.
• The company is also having an Operational Presence on Domestic and International Grounds. In Domestic, they are having an operational presence in Andhra Pradesh, Telangana, Karnataka, Tamil Nadu, and Maharashtra. While in Foreign presence, they operate in Uganda and Kenya as well.
• The company is having 13 Processing Plants, where they get the raw materials transformed into Packaged Milk and Dairy-based Value Added Products.
• Talking about the subsidiaries of the company, it is having 4 subsidiaries, which are:

i) 100% wholly-owned Subsidiary in Singapore- Dodla Holding Pte. Ltd.

ii) 100% Wholly-owned Subsidiary in Uganda- Lakeside Dairy Ltd.

iii) 99.90% owned subsidiary in Kenya- Dodla Dairy Kenya Limited.

iv) 99.90% Owned Subsidiary in India- Orgafeed Pvt. Ltd.

The company is also having one Associate Company by the name of Global VetMed Concepts in India wherein, it holds a stake of 47.94%.

3. Financial Performance:

i) Revenue from Operations and Revenue Mix:

• Between FY18 to FY20, the revenue has grown at a healthy double-digit rate of 16% CAGR.
• In terms of value, the revenue of the company for FY18, FY19, and FY20 is Rs. 1,590 Cr., Rs. 1,692 Cr., and Rs. 2,139 Cr. respectively.
• As of 9MFY21, the revenue of the company has been affected due to Covid-19 Pandemic and has come down to Rs. 1,414 Cr.
• As of FY20, the company derived 72.8% of its revenue from Milk 27.2% of the revenue is derived from Value Added Dairy Products.
• While as of 9MFY21, the contribution of Milk has increased to 75.3%, while revenue contribution of Value Added Dairy Products has gone down to 24.7%.

ii) Operating Profit & Margin:

• The Operating Profit of the company has grown at a CAGR rate of 11.7% from Rs. 113 Cr. in FY18 to Rs. 134 Cr. in FY19 to Rs. 141 Cr. in FY21.
• The Operating Profit of the company got a strong jump in the 9MFY21, where it crossed the mark of Rs. 200 Cr. and reached Rs. 207 Cr.
• The Operating Profit Margin of the company also hovered around 6.6% to 8% between FY18 to FY20.
• But in 9MFY21, the Operating Profit, as well as the Operating Profit Margin of the company, has increased to 14.6%.
• How did Large Dairy Companies Benefit amid Covid-19 Pandemic:
• Drop-in Milk Procurement Prices
• The simultaneous uptick in Selling Prices of Milk & Dairy Products
• Strong upsurge in EBITDA Margins in FY21

iii) Net Profit:

• Between FY18 to FY20, the Net Profit of the company reported degrowth of 6.3% CAGR.
• The Net Profit of the Company in FY18, FY19, and FY20 was Rs. 57 Cr., Rs. 63 Cr., and Rs. 50 Cr. respectively.
• But in the 9MFY21, the Net Profit of the company rose to a significant Rs. 116 Cr. while the Net Profit Margin stood at 8.2%.

iv) How to Achieve Right Balance between Growth & Profitability? (ROCE vs EBITDA Margin):

• In Traditional Products like Milk, Curd, Buttermilk, etc., there are lower EBITDA Margins between 4%-6%.
• Further which offers Higher ROCE, due to lower investments towards capacity expansion. Traditional Products Enjoys a negative working cycle due to lower shelf-life. Local Players dominate Traditional Products
• In the case of Value Added Dairy Products (VADPs) like Cheese, Ice-Cream, Whey, Paneer, Ghee, and Yogurt & Shrikhand, etc. there are Higher EBITDA Margins driven by High Margin Products and Ease of passing on material costs to customers.
• Here, Higher Capital Expenditure is incurred in setting up Manufacturing Facilities for VAPs, which leads them to fetch lower ROCE.
• Hence in VADPs, Organized Players dominate Value Added Products.
• Therefore, a dairy needs to maintain the right mix of Milk and VADPs to balance growth & profitability
• The profitability of dairy players depends primarily on: Milk prices in a particular region and the Extent of Value Addition in Product Portfolio

4. Peer Comparison:

i) Operational Parameters:

• There are 3 listed players in this segment which are: Hatsun Agro Product and Heritage Foods.
• In terms of Milk Procurement (Tonnes Per Day), Hatsun is ahead of Heritage and Dodla. It procures 2,651 TPD of Milk, while the same is 1,375 TPD and 1,178 TPD for Heritage and Dodla respectively.
• In the case of Procurement Reach of Farmers per Network, Hatsun Agro is again ahead of all others with 4 Lakh Farmers per Network. The same is 3 Lakh and 1.8 Lakh for Heritage and Dodla Foods respectively.
• Hatsun is having 10,000 Bulk Chillers, while Heritage Foods is having 111 Bulk Coolers and 77 Chilling Plants. Dodla Dairy owns 94 Chilling Centres.
• In the case of No. of Plants, Hatsun is having 18 plants, the highest among all. Heritage is having 16 plants while Dodla is having 14 plants including cattle feed plants).
• Hatsun is having a presence in 5 states, while Heritage Foods and Dodla Dairy is having a presence in 15 States and 11 States respectively.

ii) Financials:

• In terms of Revenue Growth on 3 Years CAGR basis between FY17 to FY20, Dodla Dair has delivered the highest growth of 14.1% while in the same period Hatsun and Heritage have delivered revenue growth of 8.3% and 12.8% respectively.
• Further, the Net Profit Growth on 3 Years CAGR basis between FY17 to FY20 is also quite impressive for Dodla Dairy. The other two companies- Hatsun and Heritage have reported negative Net Profit growth of -6% and -187% respectively for the given period. Whereas Dodla Dairy can generate positive Net Profit Growth of 3.5% for the same period.
• In the case of EBITDA Margin, Hatsun is quite ahead of Heritage and Dodla with an EBITDA Margin of 10.5%. EBITDA Margin of Heritage is -2.8% and it is 6.6% for Dodla.
• For Dodla, 27% of its revenue is generated from the VADPs, the same is 32% and 23% for Hatsun and Heritage Respectively.
• In ROE, Hatsun is at 12.4%, Heritage at -34.6%, and Dodla is at 11.5%.
• Dodla is having a ROCE of 17%-highest among their peers. ROCE of Heritage is in the negative region at -18.8%, the same is 14.9% for Hatsun.
• As of December 2020, the Debt to Equity Ratio of all the 3 companies is as follows: Hatsun (1.28), Heritage (0.06), and Dodla (0.17).
• Another big positive for Dodla Dairy is its Lowest Working Capital Cycle of 11 days. Whereas Hatsun and Heritage are having a Working Capital Cycle of 27 and 13 days respectively.

5. Key Strengths & Risks:

i) Strengths:

• Dodla Dairy is Biggest Strength 3^rd Largest in India in terms of Milk Procurement per Day
• The company is having an Extensive Product Portfolio (across Milk-based Value Added Products).
• Higher B2C Sales with Strong Branding. Dodla Dairy Directly sells Dairy-based Value Added Products in the Branded Consumer Market in India. Dodla Dairy does not sell its Value Added Products (VAPs) on a B2B basis). This was one of the reasons that led to the weak performance of two dairy companies earlier: Prabhat Dairy and Parag Milk Foods
• Owns & Operates 13 Processing Plants (to Process Raw Material into Packaged Milk & VAPs).
• Strong Distribution Network across 11 States in India. 2^nd Biggest by Market Presence among Private Dairies.
• Having Global Presence in the countries like Singapore, Uganda, Kenya.

ii) Risks:

• Adverse Impact of COVID on Dairy Business (sales Dampened). Uncertain future on COVID 3^rd wave due to which FY22 Revenue may remain muted.
• Very High Dependency on Large Raw Milk Procurement at Competitive Prices. Inability to procure an adequate amount of raw milk from Farmers or Third-party supplier at competitive prices may hurt: company’s business, results of operations & financial condition
• The company has certain contingent liabilities that have not been provided for in its financial statements. Total contingent liabilities at about Rs.165 Cr. It may adversely affect financial conditions if they materialize.

6. Valuations:

• At Annualized EPS of FY21 i.e., 27.9, and at the upper price band of Rs. 428 the expected PE ratio of the company is 15.4.
• The market capitalization of the company post listing is Rs. 2,546 Cr. making it a micro-cap or a small-cap company.
• Among the listing players, Hatsun Agro is the big player in terms of Market Capitalization. It is having a market cap. of Rs. 19,877 Cr. The stock is currently trading at a PE ratio of 81.
• The PE Ratio of Heritage Foods and Parag Milk are 13 and 65 respectively.
• The IPO Price Band is a bit higher than recent deals:

i) On February 2, 2021, International Finance Corporation purchased 26.5 Lakh shares of the company at the price of Rs. 377 per share.

ii) On June 11, 2021, Few members of Promoters transferred 9.7 Lakh shares to SBI Mutual Fund at Rs. 411.5 per share.

Conclusion:

As of now, the Grey Market Premium is suggesting a nominal listing gain in the IPO of Dodla Dairy. The IPO is currently providing Grey Market Premium of 20%-25%. On the second day of the IPO, the issue has been subscribed by 3.3 times. Investors looking at this stock from a long-term perspective should analyze the stock more after listing. But those investors who want to apply for listing gain can apply as there is some amount of listing gain available. Do follow your due diligence or consult the financial advisor before making any investment decision.